China’s Economy: Mighty Dragon or Paper Tiger?

China’s Economy: Mighty Dragon or Paper Tiger?

Every Communist must grasp the truth; “Political power grows out of the barrel of a gun.”

Mao Tse Tung

Launching massive projects such as the One Belt One Road initiative and establishing the Asia Infrastructure Investment bank, China has moved a long way from Mao Tse Tung’s epic quote Or has it really just grown in military might and armed itself on the strength of a booming economy. At a time when its domestic economy looks vulnerable to shocks and fragile amid warning of a massive financial crisis ahead, is China still the mighty dragon or a paper tiger?

Looking at whether enduring economic power of this Eastern nation is for real or not, we look at how China’s economy has evolved over the years and whether it really is a force to contend with in the economic realm.

Paper Tiger

1. Rising debt, Ageing population

Counted as the world’s biggest economy by some measures, the truth is that China is beset by slowing down of growth and rising debt even as a rapidly ageing population adds to its woes. Leaders appear to lack clarity on how to tackle these challenges and their impact on the Chinese economy.

2. Structural Reforms Losing Momentum

Another crucial aspect of China’s economy is the lack of structural reforms. Till China acts more decisively to rebalance its economy, it will not only constrain domestic growth, but global economic goals as well.

3. Economy’s Future a Series of L-Shaped Downward Curves

Many experts have cited that the economy of China is not set for U or V shaped but L-shaped downward growth. A steady decline in long term growth means no quick bounce back. China may not be able to recoup its losses on the economic front.

4. Towering Debt

The massive debt in China between 250 to 300% of the current GDP has trebled since 2007 and continues to rise. China’s debt problem has led the Bank of International Settlements to warn the Chinese that a banking and financial crisis may be inevitable in the next three years. The IMF also holds that overall budget deficit targeted at 3 percent of GDP this year, has widened three times the actual level. Much of the expanding credit is going into asset bubbles to insolvent borrowers and finally the coffers of state owned enterprises.

5. Capital Investments Fall

In July 2017, the capital investments of China fell. Private job creators now struggle to raise money for business and generation of employment therein. This is hardly the indication of a healthy economy, let alone a booming one.

6. Economic Parameters

China has actually been going backwards. Final household consumption, at 39 per cent of GDP, is not just extraordinarily low by international standards; it is well below its 47 per cent share in 2000. Though services now contribute more in nominal terms to growth and output than do manufacturing and construction, that is largely attributable to a sharp slowdown in fixed asset investment and rapid expansion of financial and property-related services, both fuelled by the bubble economy.

Mighty Dragon

1. International Initiatives

The ambitious and costly OBOR on which China has staked personal prestige has proved to be worthy of the hype. China’s transformation is without any parallels in the history of global economy.

2. New Reforms

The country is reforming and reshaping to become the growth engine of the 21st century. China will pursue steady yet sustained reforms.

3. Unparalleled Growth

China had an enviable growth rate of 6.7 percent in the previous year. The target for 2017 was 6.5 percent or higher. The country is opening its capital account and financial markets to rising foreign
investment.

4. Corporate Governance and Transparency

There is also greater focus on transparency and good principles of corporate governance that aid a healthy stock market. The IMF admitted the Yuan into basket of reserve currencies and foreigners were given freer access to the third largest bond market.

5. World Leader of Economic Globalisation

OBOR is creating a network of financial and trade connections in MENA, EU and Asia. China is the world leader when it comes to promoting economic globalisation. Within the coming 5 years, it will invest US750 billion overseas with Chinese companies accessing more markets, boosting capital flow, influence and connectivity.

6. Outbound investments rise

The outbound investments of the country continue to rise pegged at 44 percent Y-O-Y to US $17.01 billion in 2016 according to its National Bureau of Statistics.

7. RCEP to the Fore

The idea that shift in policies would weaken US alliances with Asia impacting China’s growth is unfounded. China is set to create the Regional Comprehensive Economic Partnership embracing every east Asian country, India and Australasia excluding the US.

China is advancing, but the pace is questionable. Growing resistance to Chinese acquisitions abroad is one reason the economy is not growing fast. Western authorities have blocked Chinese deals worth USD 40 billion since mid-2015! OBOR comes with political strings attached. Debt, falling prices and weaker global growth means China’s economy is a toothless tiger. Consider that construction industry in China on average 2 per cent on their assets, yet pay 5 per cent on borrowed money.

China’s scramble to acquire oil and natural resources assets around the world, often at the peak of the market, don’t make sense in the context of the renewable energy revolution. China’s National Overseas Oil Corporation took a US$1.2 billion loss in 2017 alone. China may have a lot of economic power, but this is not limitless and its capacity to finance foreign investments that earn meagre returns is not unlimited. As China continues to increase its military budget instead of tackling bad loans, a shrinking labour force and acute shortage of resources has further exacerbated the condition. China might think it is a mighty dragon, but the Oriental nation is a far cry from it.